Managerial Extrapolation: Who and When?

54 Pages Posted: 26 Jul 2021 Last revised: 14 Jan 2022

See all articles by Dayong Huang

Dayong Huang

University of North Carolina (UNC) at Greensboro - Bryan School of Business & Economics

Lijun (Gillian) Lei

University of North Carolina at Greensboro

Mengmeng Wang

University of North Carolina (UNC) at Greensboro

Yuhang Xing

Rice University

Date Written: July 10, 2021

Abstract

In this paper, we use managerial guidance data from I/B/E/S and an extensive list of controls to show a strong overextrapolation of earnings by firm managers. We find the degree of overextrapolation is driven by the persistence of the underlying earnings process as well as factors that can affect the representative heuristics, including salience, volatility, and local housing prices. Further, firms with a high expected earnings’ growth rate subsequently underperform their counterparts by 0.5% per month. By exploiting exogenous variations in firms’ profitability resulting from the Tax Cuts and Jobs Act of 2017, we provide clean evidence for managers’ overextrapolation of past earnings.

Keywords: Guidance, Extrapolation, Over-extrapolation, Earnings

JEL Classification: G12, E44, Q43

Suggested Citation

Huang, Dayong and Lei, Lijun and Wang, Mengmeng and Xing, Yuhang, Managerial Extrapolation: Who and When? (July 10, 2021). Available at SSRN: https://ssrn.com/abstract=3884059 or http://dx.doi.org/10.2139/ssrn.3884059

Dayong Huang (Contact Author)

University of North Carolina (UNC) at Greensboro - Bryan School of Business & Economics ( email )

401 Bryan Building
Greensboro, NC 27402-6179
United States

HOME PAGE: http://sites.google.com/a/uncg.edu/dayong-huang/

Lijun Lei

University of North Carolina at Greensboro ( email )

P.O.Box 26170
Greensboro, NC 27412
United States

Mengmeng Wang

University of North Carolina (UNC) at Greensboro ( email )

P.O.Box 26170
Greensboro, NC 27412
United States

Yuhang Xing

Rice University ( email )

6100 South Main Street
Houston, TX 7705-1892
United States

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